Monetary Policy, Expectations and Commitment
42 Pages Posted: 17 Aug 2002
Date Written: June 2002
Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these optimal reaction functions and instrument rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs well on both counts.
Keywords: Commitment, interest rate setting, adaptive learning, stability determinacy
JEL Classification: D84, E31, E52
Suggested Citation: Suggested Citation